As a result of the current global COVID-19 pandemic and the ensuing recession that we are facing, business rescue and its relief measures have attracted the attention of many struggling businesses.
 
Hoping that it will aid their distress and provide a solution to their indebtedness, many are contemplating instituting business rescue proceedings in an attempt to save their businesses. While it is true that business rescue procedures may offer relief to its applicants, the procedure is not available to everyone.
 
So, what is business rescue exactly? 

Business rescue entails a legal process where a company or a close corporation that is financially distressed is supervised by a suitably experienced professional (a bit more about the business practitioner in our following blogs with the objective of either rehabilitating the company or close corporation so that it can resume its business activities on a solvent basis or to provide creditors with a better return than would ordinarily result from liquidation of the company.
 
From the start, it is clear that business rescue is not available for business trusts, sole proprietors or partnerships. It is only available to companies and close corporations that experience financial distress and where there is a reasonable prospect of rescuing the company. 

So what is required in order to be considered “financially distressed”?

In terms of the Companies Act 71 of 2008, a company is in financial distress in either of the following instances:

1. Where it appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediate next 6 (SIX) months.
2. Where it appears to be reasonably likely that the company will become insolvent with the immediate next 6 (SIX) months, meaning that the liabilities and debts of the company exceed its assets and the situation probably will not change during the next 6 (SIX) months.

The debts mentioned above may include rental owing to a landlord, income tax owing to SARS, operational costs, expenses owing to suppliers and services providers as well as salaries owing to employees.

The company is believed to be “financially distressed” – now what?

Once it is established that a company is financially distressed, the board of directors of the company (remembering that this will also include members of a close corporation) must have reasonable grounds to believe that there is a reasonable prospect to rescue the company from its financial distress. 

Initially, whether a company should be placed under business rescue is a decision to be made by the board of directors of the company. This decision, however, should not be taken lightly. Electing to commence with business rescue, or even resolving to not commence with business rescue, may give rise to personal liability on the part of the directors. What is more, there are strict guidelines and time frames which need to be adhered to when placing a company under business rescue.
 
If you are considering placing your business under business rescue, we would advise that you first seek professional and legal advice on the matter.

Stay tuned for our next blog post – the timelines of the business rescue process.

*By Candice Reynders and Linki Scholtz